Horizons for Brazil in Lula's Second Administration

21/07/2012

The Brazilian President, Luis Inácio Lula da Silva (best known for his nickname “Lula”), was recently reelected in one of the most controversial elections to date. Although his first office was tarnished by several corruption scandals, which also involved important politicians directly connected to him, Lula was easily reelected. Political experts affirm that his reelection is a direct result of a specific social program providing for allowances to low-income people. Nonetheless, given that the main promise of his campaign was to achieve annual growth rates of at least 5%, the following comments highlight the most important subjects that Lula will be required to tackle and solve in the future. One of the main matters is the tax reform which is linked to the high level of expenses of the government and to the Brazilian federal system. Lula’s challenge will be to propose and approve in Congress a tax reform able to rationalize the complex tax system and to reduce the tax burden of companies (currently estimated at an approximate 38% effective rate). However, the reduction of the tax burden depends on controlling and reducing government expenditure, a very sensitive issue. Moreover, control and reduction of government expenditure involve a debate concerning which level of the government (federal, state, or municipal) will be accountable for such adjustments, which may end up in another discussion regarding the federal system form of Brazil and allocation of tax power among federal, state and municipal levels. Another sensitive subject is the reform of the social security system which appears to be in the verge of a collapse. If this reform is not implemented, there will be a risk that the social security agency will not be able to pay pensions and other benefits to individuals entitled to them in the future. Other reforms related to the organization of unions and labor are also expected. The reform connected with the organization of unions intends to implement full freedom to such entities while the changes in labor would soften labor rights. In spite of the inherent difficulty of the above referred matters, it is expected that Brazil will in any way continue to be a competitive target for foreign direct and indirect investments with at least its steady economic growth and with the strengthening of its capital markets. In this context and in order to attract more foreign investors, the federal government is already proposing limited changes to tax legislation to attract investments to certain fields, such as infrastructure. In any future scenario, it is important to point out that the safe rotation of right and left parties in government evidences the existence of a pure democracy and that old concerns (such as the risk of expropriation of assets by the government, prohibition of repatriation of funds, uncontrolled inflation, etc.) should no longer exist.